Gender bias hurts first-time borrowers

28 July 2014

First-time borrowers can be charged higher interest rates and receive smaller loans from bank staff of the opposite sex because of gender bias, a new study has revealed.

Gender bias leads to first-time borrowers paying between 35 and 40 basis points in higher interest rate and getting 4% shorter maturities on their loans, according to a 10-year study co-authored by a professor at London's Cass Business School.

It also found that borrowers who deal with members of the opposite sex were 11% less likely to return to the same bank for a second loan, and that the gender bias among bank staff was stronger when it was a small branch or when local competition from other banks was weak.

The research based on the experience of a large Albanian bank suggests that gender discrimination in lending is linked to the professional experience of loan officers, rather than their individual 'taste'.  And inexperienced bank staff matched to opposite-sex borrowers charged, on average, interest rates 60 basis points higher.  

The study also found that gender bias was strongest when the competition from other local banks was weaker or where the branch size was smaller.

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Negative repercussions

Professor Thorsten Beck said: "We found gender bias creeps into the decisions of loan officers when they deal with small loan requests from customers on whom they have little information.  

"For consumers, this has negative repercussions in the form of higher interest rates, smaller loans and lower demand. For credit providers, it means lower profits in the long-run due to fewer returning customers."

However, he added that the findings are "particularly concerning for borrowers in developing countries who already suffer from credit rationing because of weak legal institutions and a lack of collateral".

The research found that "loan officers have less discretion to indulge in their gender preferences when banks face greater competition from outside lenders, leading managers to more closely monitor loan decisions, or in large branches, where it is easier to replace staff".

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